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Economic Loss Case Analysis

The decision is a good candidate for review in the Supreme Court if Cold Spring petitions for it, and sound reasons exist for reversal should review be granted.

First, it must be noted that neither of the two cases the court of appeals cited as limiting its power to expand the economic loss doctrine to service contracts bar application of the doctrine.

In Citizens State Bank v. Timm, Schmidt & Co., 113 Wis.2d 376, 335 N.W.2d 361 (1983), the issue was whether an accountant could be liable in tort to a third party not in privity with the accountant.

The economic loss doctrine was not relevant to the case, nor could it have been. The whole point of the doctrine is that two parties who enter a contract have the opportunity to spell out risks within the contract. A third party has no such opportunity, and the doctrine is thus inapplicable.

The same is true in the other case cited by the court of appeals — A.E. Investment Corp. v. Link Builders, Inc., 62 Wis.2d 479, 214 N.W.2d 764 (1974). The issue there was whether a third party could sue an architect in tort. Because a third party was involved, rather than two parties who had a contract, the doctrine was irrelevant to the case, as well.

Furthermore, the principles that underlie the economic loss doctrine are applicable, regardless of whether an action involves a contract for services or goods: (1) to maintain the fundamental distinction between tort law and contract law; (2) to protect commercial parties’ freedom to allocate economic risk by contract; and (3) to encourage the party best situated to assess the risk [of] economic loss, the commercial purchaser, to assume, allocate, or insure against that risk.” Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 573 N.W.2d 842, 846 (1998).

In the case at bar, the egg farmer is obviously in a far better position to assess the risk of the chickens dying than an electrician. In addition, the farmer can, and did, insure against the risk.

In the event that the Supreme Court does not hear the case, and this case becomes binding precedent, defendants seeking to apply the economic loss doctrine to service contracts nevertheless have a good chance of taking advantage of it, if they can get the case removed to federal court.

The Seventh Circuit generally follows state intermediate appellate courts, but is not bound to. Instead, it must apply the law as it believes the Wisconsin Supreme Court would apply it. McGeshick v. Choucair, 9 F.3d 1229, 1232 (7th Cir. 1999); Home Valu, Inc. v. Pep Boys, 213 F.3d 960, 964 (7th Cir. 2000).

The Seventh Circuit has never definitively decided whether it believes the Supreme Court would apply the doctrine to service contracts. In Rodman Industries, Inc. v. G & S Mill, Inc., 145 F.3d 940, 943 (7th Cir. 1998), it avoided the question by classifying a contract for both services and goods, as being primarily a contract for goods, even though the cause of the plaintiff’s damages was not a defective good, but defective installation.

The Home Valu, Inc. decision suggests that the Seventh Circuit might apply the doctrine, even if the case at bar becomes binding precedent in Wisconsin state courts.

The Seventh Circuit will reject state appellate court precedents if “there is a compelling reason to doubt that [those] courts have got the law right. Rekhi v. Wildwood Indus., 61 F.3d 1313, 1319 (7th Cir. 1995).


Wisconsin Court of Appeals

Related Article

Economic loss doctrine does
not apply to service contracts

Here, the court of appeals engaged in no analysis of whether the doctrine should apply; it only held that it is not its job to expand the doctrine. The court of appeals having not even made an effort to “get the law right,” there is no reason for the Seventh Circuit to defer to the court of appeals.

Furthermore, the Seventh Circuit’s policy when interpreting state is law is, “we generally choose the narrower interpretation which restric
ts liability, rather than the more expansive interpretation which creates substantially more liability.” Birchler v. Gehl Co., 88 F.3d 518, 521 (7th Cir. 1996); Home Valu, 213 F.3d at 963.

In Home Valu, in the absence of Wisconsin Supreme Court precedent, the Seventh Circuit held that the economic loss doctrine bars claims for fraud in the inducement of a contract. The rule of construction restricting liability in such instances suggests that, until the Wisconsin Supreme Court decides the issue, there is a good chance the Seventh Circuit would apply the doctrine in the interim in cases such as this.

Accordingly, until there is such final word, any defendant in a case involving a service contract should attempt to remove the case to federal court if possible.

– David Ziemer

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David Ziemer can be reached by email.

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